Friday, April 30, 2010

The NotMakingThisUp ‘Pilgrimage to Omaha’ Top Ten List

Well, the polls have closed, the questions are in, and we will be passing along the following Ten Questions We’d Like to Hear Warren Buffett Asked to ace New York Times reporter (and “Too Big to Fail,” a NMTU recommended read author) Andrew Ross Sorkin, who will be one of three reporters asking questions at the meeting.

Of course, there are no guarantees than Mr. Sorkin will get to any of them when the question-and-answer session begins tomorrow morning—last year the reporters had to weed through over 5,000 questions, and there will be more than that this year—but here goes.If our readers are any indication, 40% of the questions tomorrow will have something to do with Goldman Sachs. Here are four excellent variations on that theme:

1. Goldman Sachs is a significant Berkshire investment that contradicts many of the philosophies that are the foundation of Berkshire company investments, including fair executive compensation and business integrity beyond reproach (and indictment). Short of Goldman Sachs & Company being found guilty of violating the law, when do you say you have had enough? Many Berkshire shareholders and the American people are already there.

2. Were you naive in basing your trust on people and an image of Goldman formed years ago when it was an investment bank, rather than what it has become: a proprietary trading organization that feels no obligation to look after the interests of its customers?

3. After spending your life preaching about the ills of the modern financial system and what it stands for - including advising new grads to go there only with 'noses closed' - why did you invest in the absolutely worst practitioner of that kind of finance…and then defend its 'legal but blatantly immoral and socially reckless' practices all this year?

4. You tell your managers not to do anything they wouldn’t want to read about on the front page of a national newspaper. Even if they are legally exonerated, Goldman Sachs & Company violated that fundamental principle. Berkshire owns preferred stock in Goldman. What are you doing about it?

Of course, there are other assets within Berkshire besides a preferred investment in a Wall Street bank. Indeed, thanks to the acquisition of Burlington Northern, the company now has 257,000 employees—almost as many as GE.

And based on our submissions, Buffett can expect that acquisition to account for the second-largest number out of the 60 or so questions he’ll be getting. Here’s one that sums up the gist of what’s on our readers’ minds:

5. Given the return prospects relative to the risks, pound for pound, was fully acquiring Burlington Northern the best available opportunity to allocate capital for Berkshire, given the many other attractive franchises available for partial or outright purchase during the crisis?

Goldman Sachs and railroads aside, Buffett will also be getting questions about derivatives, his late-found hunger for capital-intensive businesses, and much else that we couldn’t squeeze into a nice, round, “10.”

The following finish our list:

6. You’ve said, “In earlier days, Charlie and I shunned capital-intensive businesses such as public utilities. Indeed, the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow.” Now Berkshire has large investment in capital intensive businesses such as railroads and utilities. Have the business struggles of a thought to be sure-thing business like Coca-cola changed your thinking and increased you preference for sure-thing utilities and railroads?

7. Why haven’t you invested in real estate over the years? Assuming a good location, rents increase with inflation, cap-ex is minimal and the business is easily understandable.

8. As a 49 year-old who put the bulk of my equity investments in Berkshire Hathaway more than a decade ago, I’d like to thank you. Looking ahead, should an investor like me who will be dependent on these assets in my retirement feel comfortable with the risk of concentrating my investments in this one asset for the next 15 or 20 years?

9. Are you concerned with the number of countries - the United States included - that have "become dependent on the kindness of strangers" financially?

Before we get to Question # 10, let’s just say it sums up one thing we learned writing a book about Warren Buffett.Underneath all the public adoration of the most successful investor who ever lived, there lies a subset of investors who think a) Buffett was lucky (a “black swan event,” as one serious, thoughtful guy told us), or b) a magnificent scam artist—and I am not making that up.This later group views his foray into derivatives, and then lobbying against the derivatives proposal; his support for the inheritance tax, while avoiding it himself; not to mention his criticism of banks and mortgage brokers while maintaining a large position in Moody’s, a major contributor to the credit crisis, as well as many other apparent discrepancies in the House of Buffett, as all being signs of…well, let’s let Question #10 stand on its own.

And keep in mind we include this one not to be a wise guy. It in fact sums up the gist of the largest single group of questions we received, behind only Goldman Sachs and the railroad acqusition:

10. How long will you continue to be one of the major hypocrites in America?

One other thing we learned writing a book about Warren Buffett, and it was unfortunately reinforced in this year's Top Ten contest: thanks to emails, instant messages, Twitter, Facebook and the rest, people have lost the ability to spell.

The number of emails we here at NotMakingThisUp had to clean up via capitalization—including, sadly, “America”—was astonishing.

Next year we’re going to publish a secondary Top Ten List: “The Top Ten Emails Your Mother Would Cringe Reading.”

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

5 comments:

>>10. How long will you continue to be one of the major hypocrites in America?<<

This raises an interesting philosophical question: Is one a "hypocrite" if one acts within the limits of the law while believing (and proclaiming) that said law (or laws) should be changed? Is he a worse person than someone who ALSO thinks a law should be changed, but meanwhile takes advantage of said law WITHOUT publicly expressing his feelings about the desirability of said change? I think that the answer to both questions is "no", but I'm open to counterarguments.

I won't be at the meeting, but I'm glad to see that you again accumulated questions that (for the most part) focused on the fundamentals and key considerations for Berkshire (although four on Goldman is too many).

It would be interesting to know how many of the attendees are there to wrestle with these issues and how many are there for the pictures with Warren.

Two points:1. Specific to question 10. How long will Warren Buffet continue to be one of the biggest hypochrites in America?The answer here should be obvious to any real investor. Nobody who has big money in markets gives away his strategy. When he talks, he is drumming up bigger fools. So the answer to 10 is: As long as he wants to continue his (money making) carney.2. With respect to the general contention that the SEC suit is baseless. Rubbish. False disclosure regarding investments is not just civil fraud, it is criminal, as well. ACM was described as an independent advisor. They weren't so GS deserves jail time. No jail time, no trust in disclosure. No trust in disclosure, no markets. The reason investors can not (and yes, spell check or not, there is a difference between cannot and can not) read thousands (some may be not reading millions) of pages of disclosure every year, is that other people read them *and* there are criminal penalties for lies that cost investors. We know from point 1 why a carney like Warren thinks that particular lie was ok, what is your reason?